Citigroup Is Cleared of Fraud in EMI Sale, a Setback for British Financier Guy Hands

By PETER LATTMAN; Thomas Kaplan contributed reporting.

Published: November 5, 2010

8:10 p.m. | Updated In a stinging blow to the British financier Guy Hands, a jury has cleared Citigroup of any wrongdoing over its role in the sale of the EMI Group, the ailing music company.

Mr. Hands sought an $8 billion recovery, plus punitive damages. The jury, after only a few hours of deliberations, awarded him nothing.

EMI and Mr. Hands are now running out of options. The company risks defaulting on its debt and, barring a sharp turnaround in its business, could be forced to file for bankruptcy next year. In that case, Citigroup, as EMI's lender, would take ownership of the company and most likely sell it. Despite its troubles, EMI still has desirable assets, particularly its music publishing unit.

Terra Firma Capital Partners, the private equity firm controlled by Mr. Hands, sued Citigroup, accusing the bank of defrauding him during the auction of EMI. He said that David Wormsley, Citigroup's star British banker and his once-trusted adviser, had lied when Mr. Wormsley told him three times that there was another bidder for EMI. Mr. Hands said those misrepresentations had duped him into paying $6.8 billion for the company.

After the verdict on Thursday, one of the jurors, Dennis Posillico, a 61-year-old retired postal supervisor, told reporters that he had been leaning toward siding with Mr. Hands until the closing arguments, when he said that Citigroup's lawyer won him over.

A Citigroup spokeswoman said in a statement that the verdict ''makes clear that Terra Firma's irresponsible accusations of fraud were nothing more than a misguided attempt to gain leverage in debt restructuring negotiations.''

A spokesman for Terra Firma said the buyout firm reserved its right to appeal.

''We are disappointed that the jury found that we did not prove that we relied on misrepresentations from Citi, which caused a loss to our investors,'' the spokesman said in a statement. ''We believe that this was an important action to bring and that we had a responsibility to our investors to bring it.''

Mr. Hands displayed no reaction when the verdict was read, and he did not speak to reporters as he left the courtroom.

The three-week trial opened a window into the frenzied deal-making of last decade's leveraged buyout boom. Fueled by banks' lax lending practices, private equity firms borrowed trillions of dollars to gobble up a large swath of corporate America and businesses around the world. The debt-laden acquisition of EMI by Mr. Hands, struck just as the credit markets began to freeze in August 2007, became a vivid illustration of the excesses of that era.

Citigroup's lawyers depicted Mr. Hands as having buyer's remorse. And Mr. Wormsley testified that he had never lied to Mr. Hands. ''Rather than taking responsibility for making a mistake, he turned around and filed this lawsuit,'' Theodore V. Wells Jr., the lead lawyer for Citigroup, said. ''He made a bad business decision and is trying to shift responsibility to Citibank.''

That bad business decision has cost Mr. Hands dearly. The 113-year-old EMI, once home to both the Beatles and the Rolling Stones, has struggled mightily since it was bought by Mr. Hands. He testified that he had 60 to 70 percent of his wealth tied up in EMI. His fund, Terra Firma, has lost about $2.5 billion on the investment.

''Guy Hands couldn't fight technology,'' Mr. Wells said in court on Wednesday, addressing the woes of EMI and the rest of the music industry. ''No one's buying records anymore.''

Mr. Hands, 51, left London last year to avoid paying its steep taxes and moved to the island of Guernsey, a tax haven off the French coast. Now, his future as a private equity investor is in doubt. Terra Firma's investors are upset that he allocated so much of his fund - about one-third of the $7.7 billion pool - to one failed investment.

Mr. Hands slashed costs at EMI, which helped its financial results but alienated music acts accustomed to the label's spendthrift ways. When the Rolling Stones left the label, Mr. Hands personally appealed to Mick Jagger over lunch, to no avail.

Mr. Hands has also destroyed his relationship with Citigroup, which as EMI's lender controls the company's fate. Because of the damage, the bank is unlikely to be accommodating in future restructuring talks.

''If you accuse someone of fraud, it's really game over'' in terms of refinancing conversations, Mr. Hands testified in the trial. ''It's like putting a stick into a dragon.''

The verdict was read aloud only minutes after the court was notified that the jury had reached a decision, leaving lawyers scrambling early Thursday afternoon to return to the courtroom.

Mr. Wells sobbed when the verdict was announced.

''I think Mr. Wormsley was put through a terrible ordeal, and he was totally innocent and had done nothing wrong,'' he said afterward. ''It is a travesty he had to be put through this.''

Citigroup had significant exposure in refusing to settle the case. It was risky for the bank to expose itself to the uncertainties of a jury trial, especially when facing a potential multibillion-dollar judgment. And with the economy struggling and banks' reputations still suffering from its government bailouts and role in bringing about the financial crisis, Citigroup was not exactly a sympathetic defendant.

''If you've got a problem with a bank,'' Mr. Wells told the jury in his closing argument, ''you got to put it out of your minds.''

In his closing argument on Wednesday, Mr. Wells acknowledged that his client also got caught up in the frenzied boom-era deal-making by financing the EMI buyout, a transaction on which it earned more than $100 million in fees. But Citigroup has since written down the value of the EMI loans held on the bank's books by $2 billion.

''We should not have loaned'' Mr. Hands the money, Mr. Wells said. ''We have to live with our own bad business decision, and so does he.''

Thomas Kaplan contributed reporting.

This is a more complete version of the story than the one that appeared in print.

PHOTO: Guy Hands said Citigroup had lied during the sale of EMI, the British music company. (PHOTOGRAPH BY LOUIS LANZANO/BLOOMBERG NEWS)